MWI VETERINARY SUPPLY, INC.

Transcription

1 MWI VETERINARY SUPPLY, INC. FORM 10-K (Annual Report) Filed 11/27/12 for the Period Ending 11/27/12 Address 3041 W. PASADENA DR. BOISE, ID, Telephone (800) CIK SIC Code Wholesale-Medical, Dental and Hospital Equipment and Supplies Industry Drug Retailers Sector Consumer Non-Cyclicals Fiscal Year 09/30 Copyright 2018, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use.

2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2012 Commission file number OR TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to MWI VETERINARY SUPPLY, INC. (Exact name of registrant as specified in its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 3041 W Pasadena Dr Boise, ID (Address of Principal Executive Offices) (Zip Code) (208) (Registrant s telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934: Title of each class Common Stock, $0.01 par value Name of each exchange on which registered The Nasdaq Stock Market, LLC SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Act ) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( of this chapter) is not contained herein and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer Accelerated Filer Non-Accelerated Filer Smaller Reporting Company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No As of March 31, 2012 (the last business day of the registrant s most recently completed second fiscal quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,050,000,000. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of our outstanding common stock have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the registrant s common stock, $0.01 par value, outstanding as of November 16, 2012 was 12,794,312. Documents Incorporated by Reference Listed hereunder are the documents, any portions of which are incorporated by reference and the Parts of this Form 10-K into which such portions are incorporated:

3 1. The registrant s definitive proxy statement for use in connection with the Annual Meeting of Stockholders to be held on or about February 5, 2013 to be filed within 120 days after the registrant s fiscal year ended September 30, 2012, portions of which are incorporated by reference into Part III of this Form 10-K.

4 MWI VETERINARY SUPPLY, INC. FORM 10-K TABLE OF CONTENTS Item PART I Cautionary Statement 1. Business 1A. Risk Factors 1B. Unresolved Staff Comments 2. Properties 3. Legal Proceedings 4. Mine Safety Disclosures PART II 5. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 6. Selected Financial Data 7. Management s Discussion and Analysis of Financial Condition and Results of Operations 7A. Quantitative and Qualitative Disclosures About Market Risk 8. Financial Statements and Supplementary Data 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 9A. Controls and Procedures 9B. Other Information PART III 10. Directors, Executive Officers and Corporate Governance of the Registrant 11. Executive Compensation 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 13. Certain Relationships, Related Transactions and Director Independence 14. Principal Accountant Fees and Services PART IV 15. Exhibits and Financial Statement Schedules SIGNATURES

5 PART I Cautionary Statement for Purposes of Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 This annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following: the impact of vendor consolidation on our business; changes in or availability of vendor contracts or rebate programs; exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors or margin reductions if we become a non-exclusive distributor; transitional challenges associated with acquisitions, including the failure to achieve anticipated synergies; vendor rebates based upon attaining certain growth goals; changes in the way vendors introduce/deliver products to market; a disruption caused by adverse weather (i.e. drought) or other natural conditions or disasters; possible changes in the use of feed additives (antibiotics, growth promotants) used in the production animal markets due to trade restrictions, consumer concern and/or government regulations; seasonality; unforeseen litigation; risks associated with our international operations; financial risks associated with acquisitions and investments; the impact of general economic trends on our business; the recall of a significant product by one of our vendors; extended shortage or backorder of a significant product by one of our vendors; the timing and effectiveness of marketing programs or price changes offered by our vendors; the timing of the introduction of new products and services by our vendors; our intellectual property rights may be inadequate to protect our business; the ability to borrow on our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all; 1

6 risks from potential increases in variable interest rates; the impact of tightening credit standards and/or access to credit on behalf of our customers and suppliers; inability to ship products to the customer as a result of technological or shipping disruptions; and competition. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission ( SEC ), we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance. Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of MWI Veterinary Supply, Inc. Item 1. Business. General Our business commenced operations as part of a veterinary practice in 1976 and was incorporated as MWI Drug Supply, Inc., an Idaho corporation, in MWI Drug Supply, Inc. was acquired by Agri Beef Co. in MWI Veterinary Supply Co. was incorporated as an independent subsidiary of Agri Beef Co. in September Effective June 18, 2002, MWI Holdings, Inc. was formed by Bruckmann, Rosser, Sherrill & Co. II, L.P. ( BRS ) for the sole purpose of acquiring all of the outstanding stock of MWI Veterinary Supply Co. from Agri Beef Co. ( Agri Beef ). As a result of this transaction, MWI Veterinary Supply Co. ( MWI Co. ) became a wholly-owned subsidiary of MWI Holdings, Inc. On April 21, 2005, we changed our name from MWI Holdings, Inc. to MWI Veterinary Supply, Inc. References in this report to we, us, our, and MWI refer to MWI Veterinary Supply, Inc. unless otherwise indicated. Unless otherwise indicated, all statistical information provided about our business in this report is as of September 30, We are a leading distributor of animal health products to veterinarians across the United States and United Kingdom. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions. In fiscal year 2010, we acquired the outstanding share capital of Centaur Services Limited ( Centaur ). Based in Castle Cary, England, Centaur is a supplier of animal health products to veterinarians in the United Kingdom. On March 21, 2011, we acquired substantially all of the assets of Nelson Laboratories Limited Partnership ( Nelson ). Nelson was a distributor of animal health products to over 1,100 veterinary practices, primarily in the Midwestern United States. On October 31, 2011, we acquired substantially all of the assets of Micro Beef Technologies, Ltd. ( Micro ). Micro is a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies, and other animal health products. Micro also is a leading innovator of proprietary, computerized management systems for the production animal market. Products we sell include pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, supplies, specialty products, veterinary pet food, capital equipment and nutritional products. We market these products to veterinarians in both the companion animal and production animal markets. As of September 30, 2012, we had a sales force of 484 people covering the United States and a sales force of 22 people in the United Kingdom. We also offer our customers a variety of value-added services, including our e-commerce platform, technology management systems, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, educational seminars and pet cremation, which we believe closely integrates us with our customers day-to-day operations and provides them with meaningful incentives to continue ordering from us. 2

7 We estimate that approximately 57% of our total revenues in the United States have been generated from sales to the companion animal market and 43% from sales to the production animal market. Including the gross billings from agency commissions which are excluded from our total revenues in order to comply with generally accepted accounting principles, we estimate that in the United States approximately 63% of our total revenues have been generated from sales to the companion animal market and 37% from sales to the production animal market. In the United Kingdom, we estimate that approximately two-thirds of our total revenues have been generated from sales to the companion animal market and onethird from sales to the production animal market. Geographic Information Revenues and long-lived assets by geographic region are as follows (in thousands): Industry Overview Revenues for the fiscal years ended September 30 United States $ 1,776,414 $ 1,304,794 $ 1,074,226 International (United Kingdom) 298, , ,116 Total $ 2,075,146 $ 1,565,340 $ 1,229,342 Long-lived assets as of September 30 United States $ 29,001 $ 18,953 $ 9,762 International (United Kingdom) 6,783 6,256 5,476 Total $ 35,784 $ 25,209 $ 15,238 According to Sundale Research ( Sundale ), animal health product sales in the United States for calendar year 2011 were approximately $7.6 billion based on prices at the manufacturers level. The market for animal health products in the United States is a mix of products sold for companion and production animals. Companion animals include dogs, cats, horses and other pets, while production animals include cattle and other food-producing animals. Sundale estimates that companion animal products accounted for 56% of the total market for animal health products in the United States in calendar year According to the GfK Vetrak UK market survey in October 2012 that compiles revenue statistics, animal health product sales in the United Kingdom for our fiscal year ended September 30, 2012 was approximately 770 million. Historically, the growth in the companion animal market has been due to the increasing number of households with companion animals, an aging pet population, increased expenditures on animal health and preventative care, advancements in animal health products and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. Product sales in the production animal market are impacted by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) or a change in the general economy, which can shift the number of animals treated, the timing of when animals are treated, to what extent they are treated and which products they are treated with. We support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety. We believe that these growth factors have been mitigated by the downward influence of generic drugs on pricing. Veterinarians are one of the primary purchasers of animal health products, particularly in the companion animal market. As of December 31, 2011, according to the American Veterinary Medical Association, or AVMA, there were more than 63,000 veterinarians in private practice nationwide. According to the statistics from the Royal College of Veterinary Surgeons, there are approximately 13,000 veterinarians in private practice in the United Kingdom, with a total of approximately 4,400 veterinary outlets. We believe that distributors play a vital role for veterinary practices by providing access to a broad selection of products through a single channel and helping them efficiently manage their inventory levels. Distributors also offer vendors substantial value by providing cost-effective access to a highly fragmented and geographically diverse customer base. 3

8 Competitive Strengths We believe that our strengths include: Leading Distributor to Veterinarians. While most of our products are available from several sources and our customers typically have relationships with several distributors, we have achieved this position primarily through internal growth. We believe that our broad product offering, competitive pricing, superior customer service, rapid product fulfillment and value-added services provide meaningful incentives for our customers to continue ordering from us. Our value-added services include our e-commerce platform, technology and information systems and pharmacy fulfillment programs. Our pharmacies provide an efficient way for our customers to order prescription products in a cost effective, efficient manner while ensuring that they adhere to the strict regulations for these products. Leading Sales and Marketing Franchise. Our sales representatives in the United States educate customers on new veterinary products, assist in product selection and purchasing, and offer inventory management solutions. We also publish detailed product catalogs and monthly magazines, which are often utilized by our customers as reference tools. While salespeople and printed materials are vital to our marketing strategy, we also provide on-line ordering, valuable business information and value-added services through our Internet sites, and Strong, Established Relationships with Veterinarians and Vendors. Our ability to serve as a single source for most of our customers animal health product needs has enabled us to develop strong and long-term customer relationships. For more than sixteen years we have maintained distribution arrangements with Banfield, The Pet Hospital ( Banfield ), the nation s largest private veterinary practice, and with our non-controlled affiliate, Feeders Advantage, L.L.C. ( Feeders Advantage ), a related party and a buying group composed of several of the largest cattle feeders in the United States. Since we currently do not manufacture the vast majority of the products we sell, we are dependent on our vendors for the supply of our products. While our vendors often have relationships with multiple distributors, we have long-term relationships with many of our key vendors including Boehringer Ingelheim, Elanco, IDEXX Laboratories, Merck, Merial, Pfizer and Vedco. Recurring Revenue Product Base. Over 97% of our product sales were from consumable medicines and supplies commonly required by veterinarians in their practice. Historically, this aspect of our business has resulted in a recurring stream of revenues. Sophisticated Technology and Information Systems. We continue to invest in our technology and information systems, which we believe has created a competitive advantage when delivering quality service to our customers. Our e-commerce platform offers enhanced online ordering capabilities for veterinarians. This platform provides many features for our customers with enhanced security. Our advanced computerized technology management systems offer our production animal customers the ability to more efficiently and effectively manage their animals and their operations. This includes comprehensive information collection and management decision making in the areas of health, nutrition, information and animal management. These precision management tools help implement traceability and food safety regimens while optimizing performance and the use of the consumable products we distribute. Experienced Management Team. We have a strong and experienced senior management team with substantial animal health industry expertise. The members of our senior management team have been with us for an average of over seventeen years, and each member has demonstrated a commitment and capability to deliver growth in revenues and profitability. Business Strategy Our mission is to be the best resource to the veterinary profession by delivering superior value, efficiency and innovation. Our strategy to achieve our mission is outlined below. 4

9 Increase Sales to Existing Customers. We believe that veterinary practices typically purchase animal health products from multiple distributors in the United States. For our fiscal year ended September 30, 2012, our average annual product sales per veterinary practice served in the United States was approximately $48,000. We intend to increase our share of these purchases by utilizing our proprietary customer database to focus our marketing efforts, expanding our sales force, selectively adding products to our portfolio and increasing and expanding the value-added services we provide to our customers. By increasing the dollar value of purchases made by each customer as well as their average order size, we intend to increase our profitability. Competition for hiring sales representatives who have existing customer relationships is intense and we focus on retaining valued members of our staff who have demonstrated the skills needed to successfully market our products and services. If we fail to hire or retain a sufficient number of qualified sales professionals, it could adversely impact our business. Veterinary practices typically purchase the majority of their animal health products from one wholesaler in the United Kingdom. Expand Business Assistance Services for Veterinarians. We intend to enhance our customer relationships by expanding our business assistance services for veterinarians. These value-added services include among others our e-commerce platform, technology management systems, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, educational seminars and pet cremation. Increase the Total Number of Customers. We intend to add new customers by increasing the number and productivity of our sales representatives, selectively acquiring other animal health distributors and expanding distribution centers. We believe the greatest opportunities to add new customers are in the Northeastern, Midwestern and Southeastern regions of the United States and abroad, areas where we do not hold the leading market position. Continuously Seek to Improve Operations. We continuously evaluate opportunities to increase sales, lower costs and realize operating efficiencies. Current initiatives include investments in our technology and distribution center infrastructure. We also plan to pursue alternative product sourcing strategies and have a private label program on selected products to reduce our procurement costs and increase our profitability, while maintaining strong relationships with key vendors. Make Selective Acquisitions. The United States market for animal health products distribution is highly fragmented, with numerous national, regional and local distributors. Many of these companies are small, privately-held businesses, some of which may represent attractive acquisition candidates. We also believe there are acquisition opportunities outside of the United States and we intend to seek out those companies that would be a strategic fit for us. Products During fiscal year 2012 in the United States, we sold more than 38,000 products, of which over 17,000 are stocked in our distribution centers, sourced from nearly 700 vendors. During fiscal year 2012 in the United Kingdom, we sold approximately 22,000 products, of which nearly 12,000 are stocked in our distribution center, sourced from approximately 500 vendors. For our fiscal year ended September 30, 2012, our product revenues in the United States were comprised of approximately 38% pharmaceutical products, 15% vaccine products, 12% parasiticide products, 8% micro feed ingredients, 6% diagnostic products, 2% capital equipment products and 19% of other supplies. In addition, we sell approximately 800 products in the United States under agency agreements with our vendors. Under an agency agreement, we typically solicit orders and provide customer service for a commission, while the vendor stocks and ships the products. Including gross billings from agency contracts for our fiscal year ended September 30, 2012, our product revenues in the United States were comprised of approximately 34% pharmaceutical products, 14% vaccine products, 20% parasiticide products, 7% micro feed ingredients, 5% diagnostic products, 2% capital equipment products and 16% of other supplies. We also have available on special order approximately 18,000 products in the United States that we do not normally stock in our warehouses. We continually seek to update and improve the range of products we offer to address our customer requirements. For our fiscal year ended September 30, 2012, our product revenues in the United Kingdom were comprised of approximately 75% pharmaceuticals (which include vaccines and parasiticides), 15% pet foods and 10% of other consumable supplies. Pharmaceuticals, Vaccines, Parasiticides and Micro Feed Ingredients We offer our customers a variety of pharmaceuticals, vaccines, parasiticides and micro feed ingredients. Our pharmaceutical products typically include anesthetics, analgesics, antibiotics, ophthalmics and hormones. Our vaccine products are primarily comprised of small animal, equine and production animal biologicals. Our parasiticides are used for control of fleas, ticks, flies, mosquitoes and internal parasites. Micro feed ingredients are feed grade products such as pharmaceuticals, vitamins, minerals and other nutritional products that are used to optimize the health and performance of production animals. 5

10 Diagnostics, Capital Equipment and Supplies We offer a wide range of diagnostics, capital equipment and supplies to veterinarians. Diagnostic sales typically include consumable in-clinic tests for detecting heartworm, lyme, feline leukemia and parvovirus, as well as consumable products for measuring blood chemistry, electrolyte balance and cell counts. Our capital equipment sales include anesthesia machines, surgical monitors, diagnostic equipment, dental machines, cages, lights and x-ray machines. We employ a team of capital equipment specialists to analyze the latest technologies and recommend equipment that meets our customers specific needs. Our sales of supplies include syringes, instruments, bandages, IV products, surgical consumables, grooming materials and other small equipment items used by veterinary practices. Veterinary Pet Food and Nutritional Products We offer our customers a broad selection of veterinary pet foods and nutritional products. We consider veterinary pet food to consist of two categories: foods for specialty diets and premium pet foods. Specialty diets are recommended by veterinarians to address specific medical and nutritional needs. Premium pet foods are recommended by veterinarians to promote optimal nutrition in healthy animals. Pet foods are typically sold under agency agreements. Nutritional products include dietary supplements, vitamins, dental chews and specialty treats which either help address specific medical conditions or are compatible with recommended nutritional guidelines. Value-Added Services We offer our customers a variety of value-added services, which we believe closely integrate us with our customers day-to-day operations and provide them with meaningful incentives to continue ordering from us. These services include the following: Service E-commerce platform Pharmacy fulfillment Inventory management system Technology management systems Equipment procurement consultation Special order fulfillment Educational seminars Pet cremation Description On-line ordering system that provides information to veterinary practices on products, vendor programs and purchasing history Shipment of prescription production and companion animal health products to end-users in the United States on behalf of veterinarians from our seven licensed pharmacies located in Amarillo, Texas; Edwardsville, Kansas; Grand Prairie, Texas; Harrisburg, Pennsylvania; Whitestown, Indiana; Nampa, Idaho; and Sioux Falls, South Dakota and a licensed veterinary food-animal drug retailer in Visalia, California Flexible system that facilitates counting, maintaining and ordering inventory in veterinary practices Comprehensive feed, health, information and production management systems including micro ingredient machines, health management systems and age and source verification. Consultation and demonstrations provided by our dedicated capital equipment specialists in the United States Procurement and shipment of approximately 18,000 unique products in the United States that we do not normally stock in our warehouses Seminars for our customers covering business and medical topics, frequently sponsored in conjunction with our vendors Business unit presently operating with facility in Idaho that serves veterinary practices and their clients by providing cremation services 6

11 Customers As of September 30, 2012, we served a vast majority of the veterinary practices and producers located throughout the United States and approximately one-third of the veterinary practices in the United Kingdom. These veterinary practices are typically small, privately-held businesses that we believe place at least one order per week to avoid storing and managing large volumes of supplies. We believe that these veterinary practices usually purchase animal health products from multiple distributors. We seek to be the principal provider of animal health products to our customer base. We maintain a diverse and stable customer base. Independent veterinary practices have historically accounted for approximately 85% of our product sales. Also, for more than sixteen years, we have maintained distribution arrangements with Banfield, the nation s largest private veterinary practice with over 800 veterinary hospitals, and our non-controlled affiliate, Feeders Advantage, a buying group composed of several of the largest cattle feeders in the United States. We typically do not enter into long-term contracts with our independent veterinary customers. We are a party to three written agreements with Banfield, a First Amendment to the Agreement for Product Purchases, a First Amendment to the Agreement for Logistics Services and an Agreement for Home Delivery Logistics Services. These contracts are effective from July 1, 2009 through June 30, 2012, and can be terminated by either party with or without cause upon 150 days prior written notice. These contracts provide that we will be the supplier of logistics to Banfield, and these agreements govern the pricing, shipping and other terms and conditions under which we sell our products and provide logistics to Banfield. Under the Agreement for Product Purchases, as amended, we provide a limited warranty with respect to all goods sold by us and paid for by Banfield that good title to the products is conveyed, that the products are delivered free of any security interest, that the products will conform to the description, grade and condition of the products invoiced and that all products will be free of any defects arising while the products are either in our possession or control or in the control of any carrier transporting the goods from us to Banfield. The term of our existing contracts with Banfield expired on June 30, 2012, however we are continuing to operate under the terms of those contracts. We are in current negotiations with Banfield regarding new agreements and currently expect to have those new agreements executed by the end of calendar year Sales and Marketing Our sales and marketing strategies are designed to establish and maintain strong customer relationships through personal visits by field sales representatives, frequent telesales contact and direct marketing, emphasizing our broad product lines, competitive pricing, efficient ordering capabilities, high levels of customer support and service and other value-added services. The key elements of our sales and marketing strategy are: Field Sales Representatives: Our sales force in the United States is a key component of our value-added approach. Due to the fragmented nature of the animal health products market, we believe that a large sales force is vital to effectively support existing customers and target potential customers. As of September 30, 2012, we had 316 field sales personnel throughout the United States. Our field sales representatives educate customers on new veterinary products, assist in product selection and purchasing and offer inventory management solutions. Once a field sales representative has established a relationship with a customer, the field sales representative encourages the customer to use our telesales representatives and online ordering capabilities for day-to-day customer needs. Field sales representatives work under the supervision of regional sales managers within an assigned sales territory to ensure effective communication and timely sales calls with customers. Our field sales representatives complement our telesales and direct marketing efforts and enable us to better market, service and support the sale of our products and services. Our field sales representatives are employees of our Company and are compensated with a combination of salaries and commissions. The sales staff for Centaur does not actively promote products to the veterinarians, but rather sells products and maximizes the logistics services that Centaur provides. Telesales: We support our field sales representatives and direct marketing efforts with telesales representatives in nine call centers covering the United States. As of September 30, 2012, we had 168 telesales representatives in the United States. Telesales representatives work as partners with our field sales representatives, providing a dual coverage approach for individual customers. Telesales representatives process orders and generate new sales through frequent and direct contact with customers. Telesales representatives are responsible for assisting customers with ordering, purchasing decisions and general questions. Telesales representatives utilize our customized order entry system to process customer orders, access pricing, availability and promotional information about products, and research customer preferences and order history. Our nine call centers are connected by our telecommunications system which enables them to operate as one virtual call center. 7

12 Direct Marketing: We market to existing and potential customers by distributing product catalogs and monthly magazines. We publish a small animal catalog, livestock catalog and an equine catalog. These catalogs include detailed descriptions and specifications of our products and are often used as a reference tool by our customers and sales force. We also promote our products and services in our monthly magazine, the Messenger, which our field sales representatives use as a tool to educate customers on product and vendor programs. Additional marketing tools that we utilize include specialty catalogs, customer loyalty programs, specific product and vendor programs, flyers, faxes, s and other promotional materials. For the fiscal year ended September 30, 2012, we distributed nearly 800,000 pieces of direct marketing materials to existing and potential customers. We also participate in international, national and regional trade shows to extend our customer reach and enhance customer interaction. E-Commerce Platform: We provide on-line ordering, valuable business information and value-added services to veterinarians via our primary Internet site in the United States, our Internet site in the United Kingdom, and customized Internet sites that we maintain for two of our largest customers, Banfield and Feeders Advantage. Customers can use our Internet sites to order products, learn more about products and vendor programs, print forms needed for their veterinary practice, review their historical purchases and manage their inventory. For our fiscal years ended September 30, 2012, 2011 and 2010, approximately 39%, 36% and 34%, respectively, of our product sales in the United States, excluding revenues related to Micro, were generated through orders placed over the Internet. In the United Kingdom, over 90% of our orders are placed electronically. Product Sourcing We currently do not manufacture the vast majority of our products and are dependent on vendors for our supply of products. We believe that effective purchasing is a key factor in maintaining our position as a leading provider of animal health care products. We regularly assess our purchasing needs and our vendors product offerings and prices to obtain products at favorable prices. While we purchase products from many vendors and there is generally more than one vendor for most animal health product categories, our concentration of aggregate purchases with key vendors is significant. In the United States, our ten largest vendors accounted for approximately 71% of our revenues for the each of the fiscal years ended September 30, 2012, 2011 and Pfizer supplied products that accounted for approximately 20%, 24% and 25% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively. Of the Pfizer supplied products, production animal products under a livestock products agreement accounted for approximately 11%, 13% and 12% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively. Merck (formerly known as Intervet/Schering-Plough), supplied products that accounted for approximately 15%, 11% and 10% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively. Merial Limited ( Merial ), a subsidiary of Sanofi-Aventis, supplies the majority of their products to us under an agency relationship. Commission revenue generated from Merial products accounted for approximately 52%, 47% and 49% of total commission revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively. There are two major types of transactions that can affect the flow of our products from our vendors, through us, to our customers. The method of selling products to veterinarians is dictated by our vendors. Traditional buy/sell transactions, which account for the vast majority of our business, involve the direct purchase of products by us from vendors, which we manage and typically store in our warehouses. A customer then places an order with us, and the order is then picked, packed, shipped and invoiced by us to our customer, followed by payment from our customer to us. We also sell certain product lines to our customers under agency agreements with some of our vendors. Under this model, when we receive orders for products from the customer, we transmit the order to the vendor who then picks, packs and ships the products direct to our customers. In some cases our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer. We receive a commission payment for soliciting the order and for providing other customer service activities. Our operating expenses associated with agency sales transactions are lower than in traditional buy/sell transactions. 8

13 We have written agreements with approximately 50 of our vendors. Our livestock products agreement with Pfizer provides that we shall supply selected customers in the livestock field with Pfizer products. In return, we are entitled to a fee for logistics. We are not entitled to any rebates under this contract. We are required to maintain sufficient inventory to meet our anticipated demand on a monthly basis and to store the Pfizer products in accordance with their respective label instructions. Pfizer also reserves the right to sell directly to our customers or any other party. The livestock products agreement has a one-year term that expires on December 31, 2012 and can be terminated by either party with or without cause upon 30 days written notice. The livestock products agreement is a non-exclusive buy-sell contract. Our equine products marketing agreement with Pfizer provides that we shall distribute certain products to customers in the equine field. In return, we are entitled to receive certain service incentives and rebates. We are required to maintain sufficient staffing levels of sales representatives and store and handle inventory under appropriate conditions that will maintain the quality and integrity of the products. The agreement expires on December 31, 2012 and can be terminated by either party with or without cause upon 30 days prior written notice. The equine products marketing agreement is a non-exclusive buy-sell contract. Animal health product vendors may implement sales promotions or price changes for products distributed to veterinarians that can affect the period in which we recognize revenues. In addition, at the time we negotiate vendor agreements for the upcoming year, our vendors typically establish sales growth goals for us to meet in order to receive performance rebates or may reduce or eliminate rebate opportunities. These growth goals may be based on quarterly, semi-annual or annual targets. Product returns from our customers and to our vendors occur in the ordinary course of business. We extend our customers the same return of goods policies as are extended to us by our vendors. We do not believe that our operations will be adversely impacted due to the return of products. Distribution As of September 30, 2012, we distributed our products from fourteen strategically located distribution centers throughout the United States and one in the United Kingdom. During our fiscal year 2012, we completed the move of our distribution center near Harrisburg, Pennsylvania to a larger facility. During our fiscal year 2011, we completed the move of our distribution center in Visalia, California to a larger facility. We maintain inventory levels in our warehouses appropriate to satisfy customer demand for prompt delivery and fulfillment of their product orders. Inventory levels are managed on a daily basis through our information systems. In order to meet the rapid delivery requirements of our customers, we offer next-day delivery service on most of the products we stock in our warehouses. We estimate that during the fiscal year ended September 30, 2012, we shipped same day from our warehouses approximately 98% of the dollar value of orders placed by our customers. We currently ship the majority of our orders in the United States through United Parcel Service, Inc. ( UPS ) with the balance of our orders being shipped by our own delivery trucks, local carriers, regional carriers and other national carriers. Products shipped out of the Centaur and Micro facilities are primarily shipped by our own delivery trucks. Competition The distribution and manufacture of animal health products is highly competitive. We compete with numerous vendors and distributors based on customer relationships, service and delivery, product selection, price and e-commerce capabilities. Most of our products are available from several sources, including other distributors and vendors, and our customers tend to have relationships with several distributors. In addition, our competitors could obtain exclusive rights to distribute certain products, eliminating our ability to distribute those products. Consolidation in the veterinary distribution business could result in existing competitors increasing their market share, which could give them greater pricing power, decrease our revenues and profitability, and increase the competition for customers. Our primary competitors in the United States, excluding vendors, include the following: Animal Health International, Inc.; Butler Schein Animal Health; IVESCO; 9

14 Midwest Veterinary Supply; Webster Veterinary Supply, a division of Patterson Companies, Inc.; and other national, regional, local and specialty distributors. The role of the animal health product distributor has changed dramatically during the last decade. Successful distributors are increasingly providing value-added services in addition to the products they have traditionally provided. We believe that to remain competitive we must continue to add value to the distribution channel, while removing unnecessary costs associated with product movement. Seasonality in Operating Results Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. The sales of production animal products can vary due to changes in commodity prices and weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) which may also affect seasonality. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by vendors and distributors marketing programs or price increase announcements, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made. See Risk Factors Our quarterly operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall. Additionally, while we accrue rebates as they are earned, our rebates have historically been highest during the quarter ended December 31, since some of our vendors rebate programs were designed to include targets to be achieved near the end of the calendar year. This trend has slowed some in recent years due to certain changes in vendor contracts but it still remains our largest quarter for vendor rebates. Intellectual Property We have registered with the United States Patent and Trademark Office the marks MWI, MWI Design, MWIVET.com, VETONE, PROXYRx and ANIMAL Rx PHARMACY, among others. We believe that the MWI mark is well recognized in the animal health products industry and by veterinarians and is therefore a valuable asset of ours. Our success depends in part on our ability to protect our intellectual property rights. There are always risks that third parties may claim we are infringing upon their intellectual property rights and we could be prevented from selling our products, or suffer significant litigation or licensing expenses as a result of these claims. See Risk Factors If third parties claim that we infringe upon their intellectual property rights, our financial results could be adversely affected. In addition, third parties may infringe upon or design around our intellectual property rights, and we may expend significant resources enforcing our rights or suffer competitive injury with adverse effects on our business and results of operations. See Risk Factors Our intellectual property rights may be inadequate to protect our business. Employees As of September 30, 2012, we had 1,413 employees across the United States and 216 employees in the United Kingdom. We have not experienced a shortage of qualified personnel in the past, and believe that we will be able to attract such employees in the future. None of our employees are a party to a collective bargaining agreement, and we consider our relations with our employees to be good. Website Our website address is and can be used to access free of charge, through the investor relations category, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. The information on our website is not incorporated as a part of this annual report. The public can also obtain copies of these reports by visiting the SEC s Public Reference Room at 100 F Street NE, Washington DC 20549, or by calling the SEC at SEC-0330, or by accessing the SEC s website at 10